Why the Dollar's Reserve Currency Status is America's "Achilles Heel"

[Ed. Note: While most pundits and self-proclaimed experts herald modern central bankers as “saviors of the economy,” there are a few dissenting voices who know better. We’ve featured many of them in the pages of the Daily Reckoning before. But below, Marc Faber quotes a rare member the mainstream financial sector who — rather than being a cheerleader for the establishment — isn’t afraid to call out the Fed for its hazardous monetary policy. Read on…]

Ned Goodman (born in 1937) is a successful entrepreneur (by background a geologist) and a philanthropist who also happens to be a billionaire, thanks to his Dundee Group of Financial, Resource and Real Estate Investments, which he founded in 1991.

He is also a deep thinker, and a man with common sense and a vast knowledge. Every year, Goodman airs his insightful views in a lengthy paper (the 2013 write-up was over 90 pages) published as part of Dundee’s annual report. In the 2013 report, he explains:

In Dundee’s initial Annual Report for the year 1991, dated May 11, 1992, I wrote that our investment philosophy encompassed fundamental principles and was totally oriented toward value. I stated that it was essential that we understood the business before we invested, and that we looked to purchase assets that were likely to increase in value by at least 150% over a five-year period.

We knew from past experience that we must understand how to sell before we buy, and that always requires the establishment of a selling target along with a plan of action for achieving that target… The Clarkson Centre for Business Ethics and Board Effectiveness (CCBE) report of 2013 showed that we were able to achieve a 20- year share price return of 18% per annum for our shareholders, while increasing the market price of our stock by more than 30 times over that period. I can assure current shareholders that not one part of our process and philosophy has changed since 1991…

Of the US economy, which he calls (appropriately, in my view) the “Botox” economy, he writes:

I am currently reading an excellent book by Hunter Lewis entitled Where Keynes Went Wrong: And Why World Governments Keep Creating Inflation, Bubbles, and Busts. John Maynard Keynes came up with the idea that a government could take the edge off a business recession by making more credit available when money was tight, and by spending more money to make up for lack of spending on the part of consumers and business people.

He even whimsically suggested the idea of hiding bottles of cash around town where people might find them and spend the money; thereby, causing a revival of the economy. Much of the tactics that former Fed chairman Ben Bernanke suggested, he could do in a similar vein by dropping money from a helicopter. Obviously the politicians of those days, and indeed even today, like the program of allowing government to meddle in private affairs on a grand scale. President Barack Obama is a big-time Keynesian money spender today.

But, even today, it does not seem to bother anyone in officialdom that the whole idea was actually stupid and is truly a scam.

Nobody seems concerned about the question: where does this new money come from? Whose money was it? What makes those economists think that they know better? Are not politicians supposed to work within political means rather than economic means?

There are many instances in life where we are given two ways Harold Laski to get what we want. There are honest ways and dishonest ways. There are economic means and there are political means. There is persuasion and there is force. There are civilized ways and there are barbaric ways.

But when economists undertake to get people to do what they want, either by offering them money that is not their own, by defrauding them with artificially low interest rates, or by printing money that is not backed by anything of real value (such as gold or silver), it can be said that they are using political means to achieve their goals.

There are today a large group of us “non-Keynesians” who believe that these economists have crossed to the dark side. Let us face it, if the National Assembly could make people rich simply by passing laws, we would all be billionaires.

Where Keynes’ meddling and President Obama’s usage of the Keynesian approach is of greatest danger is in the U.S. dollar being today accepted as the reserve currency of the entire world. At a time when the world is undergoing momentous changes in Europe, Latin America, the Middle East, Asia and Russia, how long can the National Assembly of the U.S. allow the Fed to go on printing dollars that are not earned and not backed by anything other than faith that they will print more if you want to cash in your Treasury bills?

How much longer will the U.S. be allowed to use the “scam” of printing reserve currency dollars and continue to have them accepted by equally smart but richer members of the world, such as China, Russia and the rest of the BRICS community? This is when we will find out where Keynes went wrong and why the world’s governments will not allow the U.S. and other countries to keep creating inflation, bubbles and busts by printing too much “paper” money.

Without the belief of the U.S. dollar as an acceptable world reserve currency, the U.S. is a bankrupt nation. The reserve currency is that country’s Achilles heel, and the stock and bond markets are not prepared for the consequences of the U.S. dollar no longer being a reserve currency.

Let us go back to 2008, when the world’s financial system failed and the world governments intervened decisively. President Obama was guided by many economists with impeccable credentials. The intention was to not only stimulate the economy, but to “jolt” it back to the schemata of borrowing and spending as usual.

Critics (me among them) asked: “Doesn’t the root problem lie in the fact that Americans have already borrowed too much, and are now taking on more with the U.S. government’s attempts to relieve the country of its debt and deficit problems? Should the U.S. be allowed by its global neighbours to continue to print paper at will that has the unique advantage of being accepted by all as a reserve currency?”

If Keynesian economics are wrong and only lead to inflation, bubbles and economic busts, then so are the economic policies of President Obama, Ben Bernanke and virtually all world governments who remain friendly with the U.S. today. What happens when, like China and Russia, they all wake up to the fact that the U.S. dollar is not worthy of being a reserve currency and the U.S. is left to borrow from its own population, many of whom are unemployed, short of spending money and over- leveraged with debt?

Throughout my 50-year career, I have subscribed to a creative habit of always thinking about the end before starting the beginning. The story goes that Pope Leo X heard Leonardo da Vinci was experimenting with the formulas for varnishes instead of executing a painting.

The Pope declared, “This man will never do anything, for he begins thinking about the end before beginning his work.” However, it is amply clear Leonardo understood that the better you learn the nuts and bolts of your craft, the more fully you can express your talents.

The great painters of the world are incomparable draftsmen. They know how to mix their own paint, grind it, add the fixative — no task is too small to be worthy of their attention.

Great composers are usually dazzling musicians. They have to know their instrument and their abilities before they make the effort to play the tune in their heads.

The same can be said about great chefs who can chop and dice better than anyone else in the kitchen. And, the best writers are well-read people. They have a rich appreciation for words and vocabulary, and a keen ear for language and grammar.

I also know that a successful entrepreneur and investor must be able to do anything — develop a product, design an ad campaign, close a deal, and placate an unhappy customer as well as, if not better than, those who work for him or her.

Creativity is good, but craft is more important, and skill gives you the wherewithal to execute whatever occurs to you. As Picasso once said while admiring an exhibition of children’s art, “When I was their age I could draw like Raphael, but it has taken a whole lifetime to draw like them.”

It reminds me of that great Groucho Marx line: “Who are you going to believe, me or your lying eyes?” A week ago, the Consumer Price Index numbers for April were reported. They showed that over 12 months, the CPI had climbed 2%. But food prices were the attention getter, reported to have risen 0.4% for the month. Annualize that. It’s hard to take government numbers seriously when confronted with the evidence of our own eyes.

Just yesterday I was dispatched to Safeway to pick up a few things. As soon as I got home, my wife noticed that a large carton of Safeway’s Lucerne brand cottage cheese, which has long been 32 ounces, has suddenly been repackaged in a 24 ounce carton.

There’s a lot of that sort of thing going on these days. We’ve all seen it — laundry detergent, cereal, paper towels, cookies, peanut butter and other products, all being repackaged to conceal price increases. But then who are you going to believe, government statistics or your own experience?

I call it the phenomenon of the incredible shrinking candy bar. We see it when inflation starts moving.

Producers, wholesalers, retailers and marketers get very creative about passing higher prices along to the consumer. You may feel deceived when you notice that the new cereal box appears to be the same size — the front of the box looks the same — but it has actually been narrowed considerably.

It wasn’t long ago that my wife came home angry because what had always been a five-pound bag of sugar had suddenly shrunk to just four pounds. Smaller packages are just one manifestation of the rising prices. Sometimes it’s a deterioration in product quality.

Other times service is downgraded. If balancing your new tires was free, now it costs; if delivery and set-up was free, now it’s extra. I suppose it’s a normal thing for people to blame the producers and the merchants for these things. But such blame is misplaced since they are victims, too. Victims of a round of monetary malfeasance dating back to the mortgage meltdown in 2008.

At this juncture, with consumer prices beginning to rise, the narrative that former Treasury Secretary Tim Geithner is proclaiming with his new book, that he and the Keynesian crew of Geithner’s predecessor, Henry Paulson, former Fed Chairman Ben Bernanke, and the rest “saved the economy,” is more than a little unseemly.

Paulson has also been full of praise for the way he and Geithner and Bernanke worked with each other to “Stop the Collapse of the Global Financial System,” as his book’s subtitle so modestly describes their heroics.

Does it strike anyone as odd that capitalism should be so very frail, and that although it is capable of creating wealth and prosperity such as the world had never before seen, it can easily be brought to its knees by the misfortunes of a handful of reckless crony banks?

Even if not true, this narrative proved to be persuasive enough to enable those cronies to become the special beneficiaries of a wealth transfer of epic and unprecedented scale.

In any event, one must take the economic “saviors’” claims of success with a great deal of skepticism.

I have quoted from Ned Goodman’s contribution to the Dundee Group’s annual report of 2013 because it is common for people in the financial sector to be central bank cheerleaders who applaud Keynesian interventions with fiscal measures (as long as they don’t involve increasing taxes on the affluent members of society) and, in particular, with monetary policies as long as these are expansionary and lift financial asset prices.

So, whereas I assume that Goodman is well aware that the 30-times increase in the market price of his company’s stock over a 20-year period is partly due to central banks’ expansionary monetary policies, he is nevertheless extremely critical of the current direction of economic policies, which have not been fully “thinking about the end before starting the beginning”.

Ed. Note: In addition to this commentary from Marc Faber (and Ned Goodman), today’s Daily Reckoning email edition contained an exclusive piece from Addison Wiggin continuing the discussion we’ve been having on Modern Monetary Theory (MMT). Not only that, but readers were also given a unique chance to learn more about how to use MMT to their advantage, and help them to better navigate the financial markets no matter what lies ahead. If you’re not getting The Daily Reckoning sent straight to your inbox, you’re missing the full story. Click here now to sign up for FREE.

About Marc Faber:

Dr. Marc Faber is the editor of The Gloom, Boom and Doom Report. Dr. Faber has been headquartered in Hong Kong for nearly 20 years, during which time he has specialized in Asian markets and advised major clients seeking down-and-out bargains with deep hidden value–unknown to the average investing public–bargains with immense upside potential. A book on Dr Faber, “Riding the Millennial Storm”, by Nury Vittachi, was published in 1998. A regular speaker at various investment seminars, Dr Faber is well known for his “contrarian” investment approach.